GDP Deflator and Inflation 4 — Questions and Answers
Question 1: During a period of hyperinflation, which would you expect to see?
- GDP deflator falling rapidly
- Nominal GDP far exceeding real GDP (Correct answer)
- Real GDP growing faster than nominal GDP
- The GDP deflator remaining near 100
Correct answer: Nominal GDP far exceeding real GDP
Hyperinflation causes the price level — and thus the GDP deflator — to soar, so nominal GDP (inflated by prices) greatly exceeds real GDP (measured in base-year prices).
Question 2: A government reports that nominal GDP grew 6% last year, but the GDP deflator rose 6% as well. What happened to living standards?
- They improved by 6%
- They remained roughly unchanged (Correct answer)
- They worsened by 6%
- They improved by 12%
Correct answer: They remained roughly unchanged
When nominal GDP and the deflator grow at the same rate, real GDP is unchanged, meaning no actual improvement in output or living standards occurred.
Question 3: Which component of GDP would be captured in the GDP deflator but is completely absent from the CPI?
- Food prices
- Medical care costs
- Prices of new residential construction (Correct answer)
- Gasoline prices
Correct answer: Prices of new residential construction
New residential construction is a form of investment (I in GDP) included in the deflator, but the CPI tracks consumer spending, not investment spending.
Question 4: In the expenditure approach to GDP, if all four components (C, I, G, NX) experience price increases, the GDP deflator will:
- Remain unchanged because volumes offset prices
- Rise, reflecting economy-wide price increases across all domestic output (Correct answer)
- Fall, because higher prices reduce quantity demanded
- Only rise if NX turns positive
Correct answer: Rise, reflecting economy-wide price increases across all domestic output
The GDP deflator reflects price changes across all components of domestic output, so if all components see price increases, the overall deflator rises.
Question 5: If a country's GDP deflator rises while the country simultaneously experiences a recession, this is best described as:
- Stagflation (Correct answer)
- Hyperdeflation
- Supply-side boom
- Demand-pull inflation
Correct answer: Stagflation
Stagflation is the combination of rising prices (rising deflator) and economic stagnation or contraction (recession), a famously difficult policy challenge.
Question 6: When the BEA (Bureau of Economic Analysis) releases GDP data, which of the following is true about the GDP deflator?
- It is published separately from GDP and requires additional surveys
- It is calculated from the same data used to measure nominal and real GDP (Correct answer)
- It is produced only by the Federal Reserve
- It is released annually, not quarterly
Correct answer: It is calculated from the same data used to measure nominal and real GDP
The BEA derives the GDP deflator directly from the same national accounts data used to calculate both nominal and real GDP, so no separate survey is needed.
Question 7: A rise in the price of domestically produced military equipment would affect:
- The CPI but not the GDP deflator
- The GDP deflator but not the CPI (Correct answer)
- Both the CPI and the GDP deflator equally
- Neither index
Correct answer: The GDP deflator but not the CPI
Military equipment is part of government (G) spending in GDP, so its price is captured in the GDP deflator, but it does not appear in the consumer-focused CPI basket.
GDP Deflator and Inflation 4
During a period of hyperinflation, which would you expect to see?